Gold Report 2012: Erste's Comprehensive Summary Of The Gold Space And Where The Yellow Metal Is Going

Erste Group's Ronald Stoeferle, author of the critical "In gold we trust" report (2011 edition here) has just released the 6th annual edition of this all encompassing report which covers every aspect of the gold space. What follows are 120 pages of fundamental information which are a must read for anyone interested in the yellow metal.

From the report:

The foundation for new all-time-highs is in place. As far as sentiment is concerned, we definitely see no euphoria with respect to gold. Skepticism, fear, and panic are never the final stop of a bull market. In the short run, seasonality seems to argue in favor of a continued sideways movement, but from August onwards gold should enter its seasonally best phase. USD 2,000 is our next 12M price target. We believe that the parabolic trend phase is still ahead of us, and that our long-term price target of USD 2,300/ounce could be on the conservative side.

In order to analyse the status quo of the gold bull market, we would like to put the development of the gold price in relation to other asset classes on the following pages. The following chart illustrates that chrysophilites11 still have little to worry about. The left-hand scale shows the ratio of the MSCI World equity index to gold, while the right-hand one depicts the ratio of a total return index of 10Y US Treasuries to gold. The chart clearly highlights the fact that the relative strength of gold (falling ratio) vis-à-vis both asset classes is still intact. Both ratios have been setting lower lows and lower highs and are thus locked in a downward trend. Gold holdings should be reduced only once a significant trend reversal becomes apparent.

We are convinced, that the global monetary expansion should continue to ensure a positive environment for gold investments. The reaction to the current crisis is already feeding into the next crisis. The idea of trying to cure a crisis that was created by an expansive monetary policy and chronically excessive debt with the same poison seems naive. The driving forces of economic health are savings and investment, not consumption and debt.

Central bank balance sheet expansions:

The combined base money supply of the four most important central banks has been growing by 15.2% per year since 2000. According to the Austrian School of Economics, this means inflation. Rising prices are only a logical consequence. From 2007 to April 2012, the balance sheets of the four most important central banks were growing from USD 3,500bn to almost USD 9,000bn. Last year alone, the increase amounted to USD 1,500bn12. The following chart shows the rate of change of central bank balance sheets since the beginning of 2007.

The following chart illustrates the combined base money supply of the ECB and the Federal Reserve. It has increased from USD 1,564bn in December 2002 to currently USD 6,578bn. The gold price more than offset the inflated money supply, increasing from USD 340 to USD 1,600 over the same period.

A chart everyone knows: collapsing purchasing power

The following chart highlights the substantial erosion of purchasing power since 1971. It describes how many units of gold one unit of the respective currency buys. Clearly, purchasing power has been on a gradual slide, i.e. one unit of currency has been worth less and less in terms of gold. The US dollar, the British pound, and the euro13 have lost almost 98% of their purchasing power since 1971. Interestingly, the Swiss franc, which was the last currency to abandon the gold standard, shows relative strength, losing “only” 90% of its purchasing power since 1971. This further confirms the preservation of purchasing power gold provides. We can also see that the downward trends are clearly intact and there is little reason to expect an imminent bottom in the various fiat currencies in relation to gold.

The following chart prompts a similar conclusion. It shows on the one hand the gold/oil ratio (i.e. how many barrels of oil does one ounce of gold buy) and on the other hand the inverted oil price (i.e. how many units of oil do I get for USD 1). For reasons of user-friendliness we have standardised both values at 100 on a logarithmic scale. Whereas the oil price in terms of gold has been stable since 1971, the USD has lost more than 98% of its purchasing power in terms of oil.

And a brief history of the history of global money supply

The following chart illustrates the development of the consolidated global money supply since 1953, expressed in SDRs (i.e. the unit of account of the IMF) and the gold price (red line). According to Peter Millar, a cycle consists of a total of five phases. In phase 1 (1952 to 1968) the money supply was growing at a stable rate of 2.8% p.a. Phase 2 (1968 to 1980) was dominated by monetary inflation and the increase in money supply of 22.7% per year. Phase 3 (1980 to 2000) was again characterised by the fight against inflation and the resulting decrease in monetary expansion (+3.4% p.a.).

We have been in phase 4 since 2001. This phase has been dominated by inflationary instability. In phase 1 and 2, the money supply expanded along economic growth rates. These were phases that provided an unfavourable environment for the gold price, making other asset classes more attractive. Phase 2 and the current phase (due to negative real interest rates, among other things), on the other hand, have created a clearly positive environment for the gold price.

Phase 5 is largely characterised by common Keynesian policies aimed at reducing debt by creating new debt. The Austrian School suggests that the recession will relentlessly uncover flawed investments and misallocations. Even more aggressive monetary expansion is launched against said process. According to Millar in this phase the return to a quantitatively lower monetary inflation is initiated via a monetary reform, the return to a gold standard, or the re-valuation of gold reserves, before a new cycle begins.

The positive trend of gold during deflation is also confirmed over a longer time horizon. The following graph highlights the fact that gold (and to a lesser extent also silver) would record a clear increase in purchasing power during deflationary phases.

That this well written, well researched, well reasoned paper disagrees with the people shilling for silver (which also seem to be responsible for junking me).

I'm starting to suspect that TPTB want to herd as many people into silver and away from gold as possible.

IMO, you should hold both, but only hold as much silver as you are willing to risk it NOT following suit with gold in a central bank revaluation. If the CBs put a bid under gold, they won't put one under silver... Which means silver won't appreciate anywhere near what gold will.

I'm advocating 1:10 gold:silver. That way if it returns to it's historical ratio, you will do well. Hold more silver if you think it's a lock that it will return to it's historical ratio - but understand that you are speculating the CBs and government will lose COMPLETE control of the situation.

In 2008 whilst holidaying in Greece I came across an Albanian merchant. He told me the story of how his grandfather had spent some years in France before returning to Albana. Shortly thereafter the communist regime took hold and at some point the government started announcing that gold had lost its value and that the government would nevertheless buy it from the people with paper currency. Remember that borders were clsed and the internet was not around.

All their neighbours rushed to hand their gold in. His grandfather swore the whole family to secrecy and never handed in the significant amount of gold he had brought back from France.

He looked at me and proudly told me that even though his grandfather was now dead, the family not only held that original gold but had added to it every year and never sold even in 1980 because things never got bad enough.

I asked him iif the rise in price woud tempt him to sell. He answered with what I believe is the crux of the matter:

'I woud never be tempted because of price. I would sell only because of desperate need and no other alternative.'

So to all of you who hate fiat but drool at the prospect of more balloney dollars, there is your answer to the whole stinking mess and how you should treat your gold.

The difference is, now there is an internet, and stupid people hand their gold not to governments directly but the cash4gold peeps for some sweet, sweet notes of debt. I really do wonder what percent of the world's population knows what the current and historical prices/valuations (w.r.t. to other resources duh) of gold are/were.

It is not where gold is going, it is where paper is going - straight into the bonfire haircut motherfucker zone. Gold is going no where. 5000 years of going no where but into people's pockets as a safety net for avoiding fiat fake debt based currency. Put that in your pipe, and smoke it. Bitchez.

Amen on that. I notice that despite spot price drops pricing at a few places I checked out has remained the same. I.e. the premium is higher. I don't know if this is because they have inventory they paid a certain price for and are holding the line, the phys and paper price is stating to decouple or what.

I picked up a tube of maples for 30 bucks canadian a pop (30.10 actually) which I was pretty happy with.

So within a 12m price of 2K and long term price of 2.3K they are expecting a parabolic move? 2.3 has to be VERY conservative if that is going to happen. Not much of a dollar devaluation to get to a 2.3K price given we've already seen 1.9K as a short term high, so I guess all our problems must get solved pretty soon for those prices to be accurate.

The problem (i think) is that rules are too intricate nowadays. Counterintuitively, it is easier to get around complex detailed rules than it would be to get around very simple rules. For instance if there was a law saying simply "a bank had to have a cash reserves of X% of their balance sheet" it would replace hundreds of pages of current regulations and rules and would be harder to work around than the current system.

Politicians and regulators like to think they are smarter than most people, but the simple fact is that people with an incentive to overcome the spirit of the law always will because a) they are typically smarter than a politician and b) have a huge incentive to find loopholes.

Yes, but as Izabella Kaminska so eloquently pointed out yesterday (to paraphrase) 'the only reason the price of gold is going up is because everybody wants to own it'. So clearly, by this stellar bit of analysis, we're in a pretty serious bear market for gold, because the only thing supporting the price is individual and central bank demand.

They already printed enough money and have enough bad debt to send gold well over 10k. What the Fed does is only relevant to very short term traders. This gold rally started in the dot com bust and continued with or without QE. Gold is marching to a tune that no short term trader can comprehend because he needs a reason for everything "right now". Gold's move is based on timeless market dogma. Gold is the only real money by default.

Iran is shipping oil to China, its top buyer, despite a row over freight terms, and Japan has taken steps to resume imports in August as Tehran finds ways to get around Western sanctions on ship insurance for its drastically reduced shipments.

I don't know - as per my previous comment, according to the esteemed ' Izabella Kaminska' the only reason the price of gold is going up is because 'people want to own it', and we're actually already in a bear market (and I guess by her logic, always have been in a bear market). Actually, the more I think about it the more I suspect Izabella is actually Jon Nadler, writing under a pseudonym.

I consider those here at ZH to be friends and allys so without sarcasm or snydenes I say: be careful with silver. Gold is what the central banks are accumulating not silver! Gold will likely be the new wealth metal while silver does OK as as an industrial metal. If there is a reset silver will not go along for the ride....gold will.

i think it will fall in price along with the economy; as we head into deflation. shorts need money; long storing powder. QE will come, but not for awhile. The next QE shows the world America is finished.

Let's take a poll on what the gold-silver ratio will get to in the next few weeks. Right now its 58.22, near two-year highs.

Does anyone think its just slightly suspicious that all futures and commodity traders will now be forced to have their trading account with a TBTF bank? After MF Global and PFG Best, who in their right mind would trade with a non-TBTF bank.